DoL Strikes Blow to Pension Plans’ SRI Strategies

The US Department of Labor (DoL) has moved to restrict the ability of pension plans to invest according to environmental, social and governance (ESG) criteria.

At the end of June, the DoL published in the Federal Register its planned new rule that would require pension fund fiduciaries to only consider factors that had a direct financial impact on beneficiaries.

According to the entry in the register, the proposal amends the investment duties section of the Employee Retirement Income Security Act (ERISA) to “confirm that ERISA requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action”.

The proposal also contains requirements relating to investment options for 401(k) retirement plans that “purport to pursue one or more environmental, social, and corporate governance-oriented objectives in their investment mandates or that include such parameters in the fund name”.

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” said Secretary of Labor Eugene Scalia. “Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

The DoL clarified that the measure was not intended to completely remove SRI criteria from investment strategies, but would instead limit it to factors that “present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories”.

The proposal is the latest move by government bodies to address calls for greater implementation of socially responsible investment (SRI) criteria.

Securities and Exchange Commission chairman Jay Clayton last month said that, while SRI criteria were material to investment decisions “in many cases”, combining ratings of environmental, social and governance factors together into one score was “imprecise”.

Meanwhile, the Government Accountability Office (GAO) this month published a report analyzing SRI disclosures made by listed companies. It found a significant difference in the standards and level of transparency provided by companies on a range of issues.

The GAO’s study reviewed the annual reports, 10-K filings, proxy statements and sustainability reports for 32 listed companies and analyzed disclosures such as the management of conflicts of interest, work on diversity and inclusion, and human rights standards.

All 32 companies disclosed how they managed conflicts, and 30 openly incorporated shareholder input into nominations for board positions. On diversity and inclusion, 28 disclosed information.

At the other end of the scale, just six companies disclosed any information about how they monitored human rights risks, and 15 did not disclose any information about actions taken to prevent and address discrimination.